Judge approves sale of Relativity TV business to lenders

Judge approves sale of Relativity TV business to lenders
Ryan Kavanaugh, founder of Relativity Media. (Paul A. Hebert /Invision/Associated Press)

A bankruptcy judge has approved a plan to sell the television assets of Relativity Media to a group of secured creditors, clearing the path for founder Ryan Kavanaugh to reorganize the rest of his firm.

Kavanaugh now must work to repair the studio that filed for bankruptcy protection in July — and his reputation as a Hollywood mini-mogul.

Judge Michael E. Wiles of U.S. Bankruptcy Court in New York approved a deal in which senior lenders will pay $125 million for Relativity's television production unit, which makes shows such as MTV's “Catfish” and CBS' “Limitless.” The business will be spun off this month.

But the Kavanaugh-backed group must still submit to the court a plan to reorganize the rest of Relativity, a process it must complete before officially emerging from Chapter 11 bankruptcy protection. The studio chief has new backing from a consortium of investors that includes supermarket magnate Ron Burkle, a billionaire who previously put money into the company and holds a seat on its board of directors.

The company still has a months-long path ahead before it comes out of bankruptcy as it irons out details of the deal and resolves remaining contract issues with production companies and other business partners. Absent unforeseen complications, the company is expected to emerge by the end of this year or in early 2016.

Experts in the film business and Chapter 11 bankruptcy cases said it's still unclear what a post-bankruptcy Relativity would look like. There is still uncertainty about how much influence the new investors would wield and what kind of resources Kavanaugh would have to make and release movies.

“Kavanaugh has new financially sophisticated bosses to report to, and there's still a long string of angry creditors left holding the bag,” entertainment investor Harold Vogel said. “The TV section that is now hived off probably has the best potential to generate solid near-term cash flow.”

Relativity, known for co-financing “The Social Network” and “Bridesmaids,” filed for bankruptcy protection after a series of box-office flops contributed to its inability to pay down debt. Court documents listed the company's liabilities at nearly $1.2 billion, compared with the $560-million book value of its assets, at the end of last year. The studio had originally hoped to emerge from bankruptcy with the whole enterprise intact.

Relativity reached out to dozens of potential investors and set up a data room with 40,000 pages of documents for interested parties to view. The company had a starting bid on the table from a group of lenders for $250 million. The senior creditors — Anchorage Capital Group, Luxor Capital Group and Falcon Investment Advisors — hoped it would sell for much more.

But by the time the bidding deadline passed, Relativity had attracted only a few bids for various parts of the company, and it did not generate any offers for the company as a whole that would match the lender group. With no competitive offers, the lenders agreed to pay $125 million for Relativity's television assets, leaving a path for Kavanaugh to take over the remainder of the company.

Kavanaugh declared victory Sunday, saying he and his consortium of investors had won the non-TV assets, including the company's film, music and digital divisions, plus minority stakes in a sports agency and distribution joint venture.

Still, it was not the result the lenders or Relativity originally desired, said Brian Davidoff, an attorney at Greenberg Glusker Fields Claman & Machtinger.

“This is Plan B,” Davidoff said. “Now [Kavanaugh's] got to show he can perform.”

The plan to sell the TV side was approved over the course of two hearings this week. At Monday's hearing in a packed courtroom, Wiles gave a preliminary go-ahead for the sale, but he waited until Tuesday to give the final OK, allowing creditors to look over the proposed deal. Kavanaugh was not present at the hearings.

Kavanaugh's lawyer, Van C. Durrer II, told the court Monday that talks among the parties had stretched for nearly “60 hours straight” with few breaks, requiring parties to “beg and even yell and scream and threaten when necessary.” But in the end, he said, the parties were able to strike a deal that resolved major differences while allowing the company to reorganize, albeit without the TV unit.

The next major hearing is scheduled for Oct. 14 to decide remaining legal issues related to the sale, mostly involving complicated rights agreements between the studio and owners of its stable of television shows and movies.

Kavanaugh and his backers — including venture firm VII Peaks Capital, independent investor Joseph Nicholas and Burkle-backed concern OA3 — have agreed to put up $60 million. Elliott Management, the hedge fund run by financier Paul Singer, will pay $35 million and take over as a lender to Relativity as it reorganizes. Relativity will also assume $30 million in debt.

The deal fueled speculation about what Burkle's involvement means for the company and Kavanaugh. Burkle has long had a toe
in Hollywood and previously teamed with Harvey and Bob Weinstein in a failed
attempt to buy Miramax. In 2012, Burkle stepped in with a significant investment in Kavanaugh's company when it was strapped for cash.

Relativity said in a news release that Kavanaugh will remain the company's chief executive and chairman. But observers who have been following the case question how much power Kavanaugh will have under his new investor regime.

Relativity would not make executives available to comment for this story. A representative for Burkle did not respond to requests for comment.

“I think Ryan is going to be on a short leash,” said Lloyd Greif, CEO of the Los Angeles investment bank Greif & Co. “I don't think it's going to be what it once was.”

Jason E. Squire, a film business professor at USC, agreed. Kavanaugh began his Hollywood career with a promise to change the film business but wound up releasing more bombs than hits.

“It is fascinating to see,” Squire said, “why anyone would support someone with such a negative track record.”